How Supply & Demand Affects Housing Prices

by Aurelio Locsin, Demand Media
    Supply, demand and house prices can change in different locations across the country.

    Supply, demand and house prices can change in different locations across the country.

    You already know that whether you’re selling your current home or buying a new one, the location, number of bedrooms, total square footage and amenities of a house determines price. But beyond those factors, price can also be affected by whether there are too many houses on the market or too many people want to buy homes.

    Interest

    Unless you’re paying cash, the only way you can afford a home is by obtaining a mortgage, which is a loan that splits up your purchase into monthly payments of interest and principle over 15 or 30 years. The interest rate determines how much house you can afford or how many buyers can afford your offering. The Federal Reserve affects these numbers by setting the rate at which banks borrow from each other. In turn, banks adjust their interest on money they lend to consumers. Lower rates mean a greater demand for housing because monthly payments will be lower. But it can also mean a greater supply, especially with new homes, as it costs less for construction companies to finance new activity.

    Seller’s Market

    A seller’s market is when there are too many buyers for the houses that are up for sale. For example, low interest rates mean more people can buy, but in a densely packed downtown, sellers may be unwilling to sell and new construction is impossible due to lack of space. The time between listing a home and selling it is shorter. Because inventory is low, prices for homes go up.

    Seller’s Market Tips

    If you sell your home at this time, you can demand certain advantages by removing any preconditions or waiting until your home has received multiple offers. If you’re a buyer, you can increase the odds in your favor by offering cash or having a pre-approval letter from the bank. This document states that you already have a guaranteed mortgage and can dispense with a lengthy approval process.

    Buyer’s Market

    A buyer’s market is when too many houses are for sale and not enough people are interested in buying. For example, a weak economy may force more homeowners to sell property they can no longer afford, but out-of-work buyers cannot afford the property either. The listing time is longer because offers are rare or don’t exist. This situation reduces house prices.

    Buyer’s Market Tips

    If you’re selling a home, consider incentives that make your property more attractive than others in the same price range. Offer to carry the mortgage or to cover transaction costs if buyers are finding it difficult to get loans. Stage your house by decorating and fixing up rooms so people can picture themselves living there. If you’re a buyer, you can demand advantages such as having repairs or additions done before finalizing the transaction, or making your offer based on certain financial conditions such as finding a loan below a certain rate.

    About the Author

    Aurelio Locsin has been writing professionally since 1982. He published his first book in 1996 and is a frequent contributor to many online publications, specializing in consumer, business and technical topics. Locsin holds a Bachelor of Arts in scientific and technical communications from the University of Washington.

    Photo Credits

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